Markets Update

Yesterday’s upward thrust in stocks, on good breadth and volume, supports my favoured scenario of a push on into 21-23 March.

There is a potential divergence in % stocks above 50MA that could spell a period of sideways range action after that.

Source: IndexIndicators

A significant divergence is now present on my medium term model for the S&P500, whilst noting that the Dax is on model, having been playing catch up from underperformance.

A couple more sessions of contined upside for stocks and we will start to hit overbought and overbullish measures again. I still have a couple of stock indices longs and will be looking to exit them at the end of this week or the beginning of next if that occurs.

A key development yesterday was an upwards break in treasury yields – the rounded bottom is gaining momentum. There is a large wall of money in treasuries that could start to flow towards risk assets.

Source: Stockcharts

My expectation, based on my previous analysis, is that commodities should be the main recipient, and that commodities should outperform stocks leading into next year’s solar peak. Yet, what we are currently seeing is the opposite.

Here are commodities versus the medium term model – very much on model. Yet I was anticipating stocks aligning with the model whilst commodities pull away. So what’s up?

The US dollar is strong again. Good economic data from the US is helping support the USD, as well as no further indication yesterday of more, or further extended, dollar-diluting programmes. As I previously noted, the US dollar is in a delicate long term position, which I expect to break downwards, helping propel commodities to their secular conclusion. However, right now we lack a trigger for that, and with fairly neutral sentiment towards the Dollar and the Euro, that doesn’t give us a reason either.

Of course a strengthening USD does not make a commodities rally impossible. Another key factor is China. Recent Chinese data has been softer than expected, and whilst expectations are for Chinese easing/stimulus, as yet the Chinese authorities are being cautious. Here are the latest OECD leading indicators, and whilst we now see a definite up turn in most countries, China isn’t following suit yet.

Source: OECD

Here’s gold. The smaller wedge is the first potential reversal opportunity. Failing that, the confluence of long term rising support, falling s/r and the 23 fib look like the next most likely bounce point.

Marc Faber is still a longer term gold bull, but anticipates gold could fall to $1500 here. Such a move would put it below all the key moving averages that have supported the secular gold bull to date and so I think it’s unlikely, but, much like the USD, it is delicately poised, and I am closely following both.

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5 thoughts on “Markets Update

  1. Thanks for sharing your research. I have just been reading the Trading The Sun and found it to be a great, clear paper. As Graham noted, Mr Market can behave very irrationally in the short term, but in the long term has a more rational perspective and correctly prices assets. The sunspot theory is a good way of explaining why humans tend to get caught up in ‘spontaneous’ waves of irrational exuberance, that markets are driven by Keynes’ famous animal spirits:

    “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities” (Keynes).

    One question – do you have any idea why the inflation/commodity price peaks seem to occur every third solar max? Why not every max or every second one? Is there any rational explanation for this? It seems clear that emotions and markets are influenced by the solar and lunar forces, but I can’t seem to find a reason why this would influence investors differently over different cycles.

    John

    1. Hi John, thanks for that.

      Good question, and I don’t have a definitive answer.

      The way I see it is that people are sun-pushed into speculative excess each solar peak and that could be either of the risk assets or both. There’s a 10 years supply lag in commodities getting mines and energy fields up and running, so I think that goes some way to explaining why we don’t see a commodities peak every solar peak – after a commodities solar peak, supply will continue to hit production for some years making for an excess into the following peak. But that doesn’t explain why we don’t get commodities peaks every every other solar peak.

      Another factor appears to be relative value between stocks and commodities, which hits extremes at secular peaks – a Dow-gold ratio of perhaps 40 at a secular stocks peak and perhaps 2 at a secular commodtities peak. It appears to take excessive and extreme herding of money into one before the balance begins to tip back. That’s a massive swing in valuation and what the ratio reveals it that it drops from 40 to 2 about twice as fast as it rises. Now if you look at a long term inflation-adjusted chart of stocks versus commodities, the latter have pretty much gone nowhere whereas the former have roared away, reflecting the human value-add in what we do with raw materials. It therefore makes sense that we would see more frequent major peaks in stocks than commodities, but why it would be 2:1 and not say 3:1 I’m not sure.

      If anyone has any other thoughts they’d be welcome.

  2. It looks like a inverse of head and shoulders formation in gold but the right shoulder is not completed yet, gold needs to fall to 1600 and we might see a fantastic rally later this year, the same you could spot in silver. Could be the last chance to buy those two for a good price.

  3. HI John and All
    I’m note sure how good this is but at first look it seems interesting.
    Using the same technique I use for equities I have modelled gold for this year.
    It is up to the 28th Jan
    Then sideways to slight down to the 23rd April and then very strong to 27th July.
    It is then slightly down for most of the rest of the year.
    But the first half of 2013 looks very very strong.
    Again not sure how valid it is yet not having done it before but the first date fits.
    Best

  4. Where is that guy who was projecting $2,100 for Gold by June at the end of February, just before we topped at $1,800? If he has sold his ahold, than we are closer to the sell off end than we ink. If he is still holding, than we got a long way to go yet, maybe towards $1,500 as Dr Faber said…

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